cost/benefit analysis
lauren II
lm_5_cba1.pptx1
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Learning Module 5 Table of Contents
Today’s Reference
Lesson 5.2
Time Value of Money and Discounting of Cash Flows
The highlighted lesson is based on Chapter 4, Sections 4.4 thru 4.6
Lesson 5.1
Introduction to Financial Analysis of IT Investments
Lesson 5.4
Net Present Value & Internal Rate of Return
Lesson 5.5 Other Analysis Techniques and Conclusions
Lesson 5.3
Return on Investment & Payback Periods
Still fewer words in slides; take good notes
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Let’s get started …
Today’s Reference
Lesson 5.2
Time Value of Money and Discounting of Cash Flows
The highlighted lesson is based on Chapter 4, Sections 4.4 thru 4.6
Lesson 5.1
Introduction to Financial Analysis of IT Investments
Lesson 5.4
Net Present Value & Internal Rate of Return
Lesson 5.5 Other Analysis Techniques and Conclusions
Lesson 5.3
Return on Investment & Payback Periods
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Entire courses in MBA programs are devoted to this learning module. Our goal here is to ensure you can perform the basic financial analyses, and carry on an intelligent conversation with your company’s MBAs and financial officers.
Delimitation
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You have estimated the total costs AND total benefits of ownership for your proposed IT solution.
Prerequisites to Cost/Benefit Analysis
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Do the total benefits of ownership exceed the costs? By how much?
Do all costs and benefits get included in the cost/benefit analysis?
Questions to be Addressed
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What is a Cost/Benefit Analysis?
A measure of the worthiness for a proposed investment. A comparison of total costs and benefits over lifetime. (Note: NOT using the cost/benefit definition presented by Bannister in section 4.4.3)
Synonyms for cost/benefit analysis
Investment analysis
Economic analysis
Financial analysis
Why do a cost/benefit analysis?
Assess “worthiness” of a proposed investment (Will this proposed investment add or subtract from the overall company profit?)
Compare “worthiness” of alternative proposed investments (If funds are limited, which of these investments will most benefit the company, financially?)
Caveat – It is acknowledged that factors other than cost/benefit analysis may affect any final decision
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Who decides whether to invest in IT?
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IT Capital Proposals
IT Steering Committee
Other Capital Proposals
Corporate Investment Committee or Board of Directors
Capital Budget
THE REAL CAPITAL BUDGET
IT’s capital allocation
Customer’s capital allocations to their own IT proposals
Loans
Representative funding process
MISSING ON THIS SLIDE = SOME ORGANIZATION UNITS CAN FUND IT PROJECTS, OR AT LEAST CONTRIBUTE TO THEM.
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Do you always do a cost/benefit analysis?
NOT if the benefits or consequences are self-evident (Bannister, 2004) For example:
Investment driven by regulatory pressures
Investment is just “the cost of doing business”
Investment is just “the cost of staying in business”
Investment is essential to an already approved strategic plan
ALL OF ABOVE USUALLY REQUIRE ONLY A TCO (but no TBO or CBA) … Why do we still need a TCO?
IF the company requires all investments greater than $________ be financially analyzed or worthy
USUALLY REQUIRES ONE OR MORE SPECIFIC CBAs; Therefore, it also requires a prerequisite TCO and TBO
IF the company has less funds available than needed to allocate to candidate discretionary investments
USUALLY REQUIRE ONE OR MORE SPECIFIC CBAs; THEREFORE, ALSO REQUIRE A PREREQUISITE TCO AND TBO
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Timing of Cost Benefit Analysis
If you are going to build your own IT solution
You have to estimate costs
You have to estimate benefits
If you are going to buy your IT solution; then integrate
If you do NOT know what IT solution you are going to buy
You have to estimate costs more conservatively (e.g., worst case)
You have to estimate benefits
If you DO know what IT solution you are going to buy
You can base cost estimates on benchmarks of other customers
You have to estimate benefits
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So what cost benefit analysis techniques are available?
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Most common CBA techniques and variations
Return on Investment (ROI) – we will modernize in lessons
Payback Period – we will modernize in lessons
Net Present Value (NPV)
Internal Rate of Return (IRR)
Less common, esoteric techniques (we will not cover these in class, but they are in the book)
Return on Management
Anchor Benchmarks
Multi-Criteria Decisions
Return on Time Invested
Value Chain Analysis (Porter)
How do you choose?
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Do the total benefits of ownership exceed the costs? By how much?
Do all costs and benefits get included in the cost/benefit analysis?
Questions to be Addressed
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Costs and Benefits Included in a Cost Benenfit Analysis
What COSTS get included in a CBA?
Every cost that includes an external or internal cash flow
All infrastructure costs that are not sunk
All software costs that are not sunk
All external services costs that are not sunk
EXCLUDE internal services costs
All internal new hires and backfill
EXCLUDE indirect labor costs (= time commitments from exisiting employees)
All miscellaneous costs that are not sunk
What BENEFITS get included in a CBA?
All direct benefits, both tangible and intangible
All indirect benefits, both tangible and intangible
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How do we conduct a cost/benefit analysis of a proposed IT solution/investment?
Remaining Lessons in this Module
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Where are we?
Today’s Reference
Lesson 5.2
Time Value of Money and Discounting of Cash Flows
The highlighted lesson is based on Chapter 4, Sections 4.4 thru 4.6
Lesson 5.1
Introduction to Financial Analysis of IT Investments
Lesson 5.4
Net Present Value & Internal Rate of Return
Lesson 5.5 Other Analysis Techniques and Conclusions
Lesson 5.3
Return on Investment & Payback Periods
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Can’t we just simply compare the total cost of ownership against the total benefits of ownership?
If TBO > TCO then investment is good
If TCO > TBO then investment may be bad (unless the investment is what we called “mandatory”)
Discussion
Because even experienced IT professionals forget the TOTAL COST OF OWERSHIP
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ISSUE: Timing of Cash Flows
Cash flows = costs and benefits
where costs are (negative cash flows)
and benefits are positive cash flows
And the realities are:
Most cost cash flows tend to occur in the early years = implementation years
Although there are also support and maintenance costs later
Some lesser cost cash flows occur after implementation = support and maintenance
Almost all benefits accrue in the middle and later years = after implementation and then every year thereafter
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CONCEPT: Time Value of Money
Money has different value over time
Possessing money today is worth more than possessing the same amount of money in the future … why?
An expected expenditure in the future has less value in current dollars
Consequently, we need to “discount” estimated cash flows (costs and benefits) to reflect the time value of money
Time value of money is documented as a discount rate
The discounted cash flow (cost or benefit) is called its present value
This allows us to normalize cash flows to their current/present value despite the fact that they will occur in different years
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What is a discount factor?
Discount factor = present value of one dollar in the future
The present value of one dollar, today, is one dollar
The present value of a dollar, in the future, is < one dollar
Formula is
Discount factor = (1 / (1 + discount rate /100 ) ) n
Where n is the number of years being discounted and the first year is NOT discounted
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Old Technique was Lookup Tables
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Your textbook showed you how these numbers are calculated (p.107)
New Techniques
Financial calculators … now built into mobile devices, such as smartphones
Spreadsheets … most have built-in functions to help with discounting cash flows
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How do you determine discount rate?
YOU don’t … it comes from your company’s financial management experts
Factors that influence discount rate include:
Currency exchange rates
Cost of money
Inflation
The current ”health” of the overall economy
Financial goals your company
Risk adversity
ADVICE: Just go ask your finance experts for the discount rate; then you can calculate or determine the discount factor
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Only cash flows should be discounted for financial analysis
In other words, we will not discount or include either sunk costs or indirect labor from the TCO
We will include all benefits, including direct and indirect
ALL included costs should be converted to (negative numbers)
ALL benefits should be positive numbers green or black
You can, and should sum the cash flows for each year (in other words, there is no need to discount each and every cash flow)
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Discounting cash flows
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Example of Discounting Cash Flows
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| Year | Sum of Costs by year (from TCO) | Sum of Benefits by year (from TBO) | Discount Factor (based on discount rate) | Present Value of Cost by Year | Present Value of Benefits by Year |
| 1 | (100,000) | 30,000 | 1.00 | (100,000) | 30,000 |
| 2 | (5,000) | 30,000 | 0.91 | (4,550) | 27,300 |
| 3 | (5,000) | 30,000 | 0.83 | (4,150) | 24,900 |
| 4 | (5,000) | 30,000 | 0.75 | (3,750) | 22,500 |
| 5 | (5,000) | 30,000 | 0.68 | (3,400) | 20,400 |
First, you have to get the discount RATE.
Let’s say the Finance Department gave us discount rate of 10%.
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Numbers from last slide
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GOOD NEWS: These discount rates are built into virtually all spreadsheets
Your textbook showed you how these numbers are calculated (p.107)
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Today, if you want to be respected by financial analysts and officers, your investment analysis MUST be based on the time value of money.
In other words, all costs and benefits must be discounted to present value before ANY credible financial analysis
Importance of Discounting Cash Flows
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Where are we?
Today’s Reference
Lesson 5.2
Time Value of Money and Discounting of Cash Flows
The highlighted lesson is based on Chapter 4, Sections 4.4 thru 4.6
Lesson 5.1
Introduction to Financial Analysis of IT Investments
Lesson 5.4
Net Present Value & Internal Rate of Return
Lesson 5.5 Other Analysis Techniques and Conclusions
Lesson 5.3
Return on Investment & Payback Periods
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Annual “Return of Investment” (commonly abbreviated ROI) is the most frequently encountered method of comparing costs and benefits of a proposed solution or investment (of any type)
Reality Check
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Annual Return on Investment (ROI)
An estimate of the ratio of profit versus expenditure
Expressed as a percentage
Similar in concept to monetary investments (e.g. stocks and bonds) where
ROI = profit ÷ investment × 100 = #.#%
(technique requires that you have an expected lifetime or maturity date)
For capital investments (like IT solutions)
ROI = (TBO - (TCO)) ÷ (TCO) × 100 = #.#% (it is important that you use ‘negative numbers for all costs) (technique requires that you have an expected or desired payback period in mind)
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Return on Investment (ROI) Procedure
Estimate Total Costs of Ownership
Sum of infrastructure costs … but not sunk
Sum of software costs … but not sunk
Sum of external services costs
Sum of internal services costs … only include if recharged
Sum of new hires and backfill costs
Sum of indirect labor costs … because these do not typically require cash flows
General Expenses … only include real cash flows
Estimate Total Benefits of Ownership
Direct tangible and intangible benefits
Indirect tangible and intangible benefits
Discount the sums of each year’s cash flows to present value
Calculate the ROI using the formula presented on last slide
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How is ROI used in financial analysis?
Compare a single investment against a minimum ROI expectation
Compare investment alternatives against each other
Especially useful if company does NOT have enough capital to fund all desired investments
Of course, you could borrow funds, but that adds to TCO (cost of borrowing) and changes the ROI
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The following example is adapted from Example 4.1 in the book
Oversimplified by author, but effectively demonstrates the technique
We have IMPROVED Example 4.1 in these slides to properly consider discounting and present value of the costs and benefits
Example of ROI
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Adapted from Bannister Example 4.1 – TCO
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| Total Cost of Ownership | TCO Non-Recurring | TCO Recurring/Year |
| Hardware Client computers Networking (LAN – including NOS) Peripherals (printers) | (50,000) (10,000) (12,000) | Example assumed no charge back internal hardware support |
| Software Page formatting software application | (25,000) | None specified; somewhat unrealistic |
| External Services (none) | 0 | 0 |
| Internal Labor Training Support Retirement packages Insurance | (8,000) (73,000) | (9,000)/year (500)/year |
| TOTAL COST OF OWNERSHIP | (178,000) | (9,500)/year |
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Adapted from Bannister Example 4.1 – TBO
Example 4.1 … continued
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| Total Benefits of Ownership | TBO Non-Recurring | TBO Recurring/Year |
| Additional profit (author called this business margin) | 0 | 14,000/year |
| Savings Maintenance of old equipment (eliminated) Wages and benefits of retirees (seemed low) | 0 0 | 14,500/year 35,000/year |
| TOTAL BENEFITS OF OWNERSHIP | 0 | 63,500/year |
Discounting Cash Flows to Present Value
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| Year | Costs by year | Benefits by year | Discount Factor | Present Value of Cost by Year | Present Value of Benefits by Year |
| 1 | (178,000) | 31,750 | 1.00 | (178,000) | 31,750 |
| 2 | (9,500) | 63,500 | 0.91 | (8,645) | 57,785 |
| 3 | (9,500) | 63,500 | 0.83 | (7,885) | 52,705 |
| 4 | (9,500) | 63,500 | 0.75 | (7,125) | 47,625 |
| 5 | (9,500) | 63,500 | 0.68 | (6,460) | 43,180 |
| SUM | (216,000) | 285,750 | NA | (208,115) | 233,045 |
For this example, let’s say we were given a discount rate of 10%.
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Discounted Return on Investment (ROI)
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| Simple ROI Analysis | Calculation |
| Reasonable Payback Period | 5 years |
| Total DISCOUNTED Cost of Ownership | (208,115) from previous slide |
| Total DISCOUNTED Benefits of Ownership | 233,045 |
| Discounted ROI = (dTBO + dTCO) ÷ -dTCO | (233,045– 208,115) ÷ 208,115 = 11.97% over 5 years Or 2.407% per year |
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“Payback Period” is still a frequently encountered method of comparing costs and benefits of a proposed solution or investment (of any type)
In fact, it is sometimes used to determine the time factor in the previously covered ROI analysis.
Payback Period or Breakeven Analysis
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Payback Period (also called Breakeven Analysis)
The amount of time we expect the IT solution’s benefits to accrue in order to fully recover the costs incurred to build and implement the solution
Classic = simple, non-discounted payback
Time that it takes for the cumulative benefits to exceed the cumulative costs … Example 4.2 in book
Modern = discounted payback
Time that it takes for the discounted benefits to exceed the discounted costs … Example 4.4 in book
The calculated payback period is then analyzed against what the company agrees is reasonable or expected payback period
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Payback Period / Breakeven Analysis
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Net Present Value of Cumulative
Benefits
Net Present Value of Cumulative Costs
Operating at a NET LOSS (Negative ROI)
Operating at a NET PROFIT (Positive ROI)
Breakeven Date
Payback Period
Money
Time
Go-Live Date
FOR TYPICAL IT PROJECTS
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Discounted Payback Period (Example 4.4 in book)
The solution finally pays for itself sometime during year 5.
Everything after year five simply adds to the net profit of the solution, even though you are still incurring costs of $25,000 (which, by the way, were unrealistically not subjected to inflation)
Example 4.5 demonstrated a real risk to this technique, namely, the possibility that the payback might be reversed by a large cash flow that occurs after the payback is initially achieved.
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| Year | Expected Cost | Expected Benefit | Net Cash Flow | Discount Factor | Present Value of cash flow | Cumulative PV |
| 1 | (100,000) | 30,000 | (70,000) | 1.00 | (70,000) | (70,000) |
| 2 | (5,000) | 30,000 | 25,000 | 0.91 | 22,730 | (47,270) |
| 3 | (5,000) | 30,000 | 25,000 | 0.83 | 20,660 | (26,610) |
| 4 | (5,000) | 30,000 | 25,000 | 0.75 | 18,780 | (7,830) |
| 5 | (5,000) | 30,000 | 25,000 | 0.68 | 17,080 | 9,250 |
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Extra Example: Payback Analysis for Ex. 4.1
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| Year | Costs by year | Benefits by year | Discount Factor | Present Value of Cost by Year | Present Value of Benefits by Year | Cumulative PV |
| 1 | (178,000) | 31,750 | 1.00 | (178,000) | 31,750 | (146,250) |
| 2 | (9,500) | 63,500 | 0.91 | (8,645) | 57,785 | (97,110) |
| 3 | (9,500) | 63,500 | 0.83 | (7,885) | 52,705 | (52,290) |
| 4 | (9,500) | 63,500 | 0.75 | (7,125) | 47,625 | (11,790) |
| 5 | (9,500) | 63,500 | 0.68 | (6,460) | 43,180 | 24,930 |
| SUM | (216,000) | 285,750 | NA | (208,115) | 233,045 | All profit after about 3 months into Year 5 |
For this example, let’s say we were given a discount rate of 10%.
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Where are we?
Today’s Reference
Lesson 5.2
Time Value of Money and Discounting of Cash Flows
The highlighted lesson is based on Chapter 4, Sections 4.4 thru 4.6
Lesson 5.1
Introduction to Financial Analysis of IT Investments
Lesson 5.4
Net Present Value & Internal Rate of Return
Lesson 5.5 Other Analysis Techniques and Conclusions
Lesson 5.3
Return on Investment & Payback Periods
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“Net Present Value” (or NPV) and “Internal Rate of Return” (or IRR) are more contemporary investment analysis techniques that are fully rooted in the time value of money. They don’t have to be adapted like we did for ROI and PBA.
Favored, Contemporary Techniques
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The concepts of time value of money, discount rates, discounting, and present value were introduced in Lesson 5.2. Return there if you need a refresher.
Net Present Value and Internal Rate of Return are the original techniques that utilized the time value of money.
Reminder
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The Net Present Value (NPV) of a proposed investment is that amount of money that we could invest TODAY in a more traditional instrument (e.g., savings account, bonds, etc.) to realize the same financial result as the proposed investment after some pre-determined time.
Definition
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Net Present Value (NPV)
ASSUMPTION: Discount Rate = 10% reminder: you get this number from Finance organization
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| Year | Costs by year | Benefits by year | Net Cash Flow | Discount Factor | Present Value |
| 1 | (100,000) | 30,000 | (70,000) | 1.00 | (70,000) |
| 2 | (5,000) | 30,000 | 25,000 | 0.91 | 22,730 |
| 3 | (5,000) | 30,000 | 25,000 | 0.83 | 20,660 |
| 4 | (5,000) | 30,000 | 25,000 | 0.75 | 18,780 |
| 5 | (5,000) | 30,000 | 25,000 | 0.68 | 17,080 |
| Sum is the TCO | Sum is the TBO | NPV = 9,250 |
NOTES:
The number of years is based on what the customer views as a reasonable payback period.
Discount rate comes from financial management, and is used to calculate discount factors.
Present value is the discounted cash flow = cash flow in present dollars
Net Present Value is the sum of the discounted cash flows.
Interpretation = This IT investment is equivalent to investing $9,250 at 6% for 5 years.
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How is NPV used in financial analysis?
Compare a single investment against itself
Positive NPV indicates a good investment … the more, the better
Negative NPV indicates a poor investment
Compare investment alternatives (IT and/or non-IT) against each other
Better investments are the ones that have the highest NPV, assuming that financial worthiness is the only factor
Allows comparison of investment alternatives with different lifetimes
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Extra Example: NPV Analysis for Ex. 4.1
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| Year | Costs by year | Benefits by year | Discount Factor | Present Value of Cost by Year | Present Value of Benefits by Year | Total Present Value by Year |
| 1 | (178,000) | 31,750 | 1.00 | (178,000) | 31,750 | (146,250) |
| 2 | (9,500) | 63,500 | 0.91 | (8,645) | 57,785 | 49,140 |
| 3 | (9,500) | 63,500 | 0.83 | (7,885) | 52,705 | 44,820 |
| 4 | (9,500) | 63,500 | 0.75 | (7,125) | 47,625 | 40,500 |
| 5 | (9,500) | 63,500 | 0.68 | (6,460) | 43,180 | 24,930 |
| SUM | (216,000) | 285,750 | NA | (208,115) | 233,045 | NPV $13,140 |
For this example, let’s say we were given a discount rate of 10%.
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The Internal Rate of Return (IRR) of a proposed investment is that rate of return that will discount all cash flows such that the Net Present Value (NPV) is zero.
Sometimes though of as inverse NPV.
Definition
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Internal Rate of Return (IRR) Procedure
The discount rate that will discount all cash flows (costs and benefits) to result in a net present value of $0.
Unfortunately, not calculable by formula
Discovered by trial and error that zeroes in on the answer, but …
… virtually all spreadsheets have a built-in function to “discover” IRR for you
Advantages
Gives a single answer as a percentage
Easier to understand than NPV for some managers
Disadvantages
Suggests that surplus cash at any point could be reinvested at IRR rate, which is not true
Bannister: Not recommended for IT investments Whitten: If your company uses it for non-IT investments, you have to use it to compete
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4. Internal Rate of Return
Using the scenario for Example 4.3
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| Year | Expected Cost | Expected Benefit | Net Cash Flow | Discount Factor | Present Value |
| 1 | (100,000) | 30,000 | (70,000) | 1.00 | (70,000) |
| 2 | (5,000) | 30,000 | 25,000 | 0.86 | 21,560 |
| 3 | (5,000) | 30,000 | 25,000 | 0.74 | 18,590 |
| 4 | (5,000) | 30,000 | 25,000 | 0.64 | 16.030 |
| 5 | (5,000) | 30,000 | 25,000 | 0.55 | 13,820 |
| NPV | 0 | ||||
| IRR | 16% |
Automatically determines
Automatically calculates
2. If NPV > 0, increase IRR; else, decrease IRR
SELECT
1. Start by picking a number (e.g., minimum IRR desired
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Where are we?
Today’s Reference
Lesson 5.2
Time Value of Money and Discounting of Cash Flows
The highlighted lesson is based on Chapter 4, Sections 4.4 thru 4.6
Lesson 5.1
Introduction to Financial Analysis of IT Investments
Lesson 5.4
Net Present Value & Internal Rate of Return
Lesson 5.5 Other Analysis Techniques and Conclusions
Lesson 5.3
Return on Investment & Payback Periods
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Is there a cost/benefit analysis or investment analysis techniques actually called “cost/benefit analysis?
If you read Chapter, you certainly got the impression that there is such a technique.
Debate/Discussion
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Cost Benefit Analysis (according to Bannister)
Your book actually introduced a technique called cost benefit analysis (section 4.4.3)
Upon closer examination, the author’s coverage is more about estimating benefits (our course = Learning Module 4)
Your instructor uses the term cost benefit analysis as an umbrella for all the techniques (ROI, NPV, PBP, IRR, etc.)
Consequently, for this course (including exam and any homework), you may IGNORE section 4.4.3 as a CBA method.
But you may find it helpful as a TBO technique to enhance your TBO spreadsheet assignment
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Are there any other cost benefit analysis techniques that we have not yet covered?
Question
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So what cost benefit analysis techniques are available?
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Less common, esoteric techniques
Return on Management
Anchor Benchmarks
Multi-Criteria Decisions
Return on Time Invested
Value Chain Analysis (Porter)
But the ones we covered in class are used > 80% of the time
Time-adjusted Return on Investment (ROI)
Time adjusted Payback Period
Net Present Value (NPV)
Internal Rate of Return (IRR)
These techniques are described (but not demonstrated) in your book
Remember, most companies will dictate which techniques you must use.
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Are there any other considerations for investment or cost/benefit analysis?
Other Considerations for Cost Benefit Analysis
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What if your payback period, or ROI, or NPV, or IRR is negative? Does that always make the investment financially poor?
Problem
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Is negative ___ always bad?
Well, if you are competing for funding against alternatives that have positive ROI, then it’s definite a disadvantage.
So, can you fix it?
Reexamine the expected payback period. A longer payback period may improve the numbers
Reexamine your benefits. Intangibles may be tipping the scale against you
Consider using the Hubbard approach to irrefutably quantity the intangible benefits (from Learning Module 4)
Use the Gildersleeve “minimum worth” technique to further analyze and present the investment (next slide)
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Or consider the “Minimum Worth Technique” technique
Estimate the total cost of ownership
Estimate the total tangible benefits of ownership (the ones that are easier)
List the intangible benefits and describe them in words as clearly as possible
Calculate tangible value = tangible benefits of ownership – total cost of ownership
If tangible value is negative, debate whether the perceived intangible benefits have sufficient value to offset the tangible value
If tangible value is positive, the system has alreay paid for itself
Gildersleeve’s Minimum Worth Technique
Example
Assume we have already discounted all costs and benefits to present value
Total total costs of ownership at PV = $(200,000)
Total tangible benefits of ownership at PV = $150,000
Then, our tangible present value = (200,000) + 150,000 = (50,000)
Presumably, we at least have a LIST of non-estimated intangible benefits
So we ask management to judge as follow
If management believes the the listed intangible benefits are worth at least $50,000 over the system’s expected lifetime, the solution is probably a good investment.
Otherwise, it is probably a bad investment
Think of this as a poor man’s Hubbard approach to analyzing intangibles … better than nothing
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And are there other factors that might offset a less than attractive economic analysis?
Problem
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Of course there are!
If the economic analysis is poor, these other factors might still result in funding approval:
Politics
A passionate sponsor
Risk tolerance or adversity
Technology malleability
Culture
Necessity … might not be able to not afford to do it
Cost of staying in business
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Any final thoughts or recommendations on the subject of cost/benefit analysis?
Final Thoughts
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Final Recommendations
Reason for IT investment should be understood to non-technical audience, regardless of financials
Find out what financial analysis methods are expected in your organization
Some level of financial analysis should always be completed
Total cost of ownership should always be estimated
Total benefits of ownership should be estimated for discretionary projects
Preferred cost/benefit analysis should be performed as required or requested
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Final Recommendations (continued)
To endear yourself to financial professionals, adjust each year’s costs and benefits to present value (using discounting methods)
Financial analyses will usually be complemented by other analyses to form a complete “business case”
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End of Learning Module 5
Today’s Reference
Lesson 5.2
Time Value of Money and Discounting of Cash Flows
Lesson 5.1
Introduction to Financial Analysis of IT Investments
Lesson 5.4
Net Present Value & Internal Rate of Return
Lesson 5.5 Other Analysis Techniques and Conclusions
Lesson 5.3
Return on Investment & Payback Periods
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